In a 21-page note, Shu reiterates a Buy rating on shares of TSM, and cuts his rating on competitor United Microelectronics (UMC) to Neutral from Buy, and reiterates a Neutral rating on Taiwan’s Vanguard International Semiconductor (5347TW), writing that the foundry business is entering a “new era“: “The semiconductor foundry competitive landscape in 2013 is shifting to a “technology-driven” mode from the purely “cost-driven” mode of the early 2000s.”

Gone are the days of “cheap money” financing to just build capacity, writes Shu. “Instead, foundries now must develop and build effective cutting-edge technology and capacity to offer rapid time-to-market and ensure quality delivery to key customers.” He thinks TSM is leading that new wave, with Samsung Electronics‘s (005930KS) captive semiconductor operations and GlobalFoundries following, “and potentially Intel (INTC).”

In particular, writes Shu, the race to get to the most advanced technology is “squeezing” companies such as UMC that can’t keep up, he thinks.

TSMC’s near-monopoly position at advanced technology nodes, i.e. 65nm and below, has painfully squeezed peers’ market shares. We believe TSMC’s strong momentum at 28nm will continue in 2013, and its early move to 20nm with strong commitments from key customers – as well as poor 20nm readiness among peers – enhances TSMC’s technology monopoly position through 2014/2015. Consequently, thanks to rising smartphone adoption and continuous cannibalization of notebooks by tablets, we expect TSMC will achieve one or two additional large customers contributing >10% of its revenues (currently just Qualcomm exceeds that 10% revenue share level) in 2013/2014. The concentration of heavyweight customers using TSMC technology is marginalizing competing foundries.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.